Tax hikes avoided as Mboweni tiptoes between the landmines
Yesterday finance minister Tito Mboweni delivered his budget speech to Parliament. This is an edited version.
The Aloe Ferox survives and thrives when times are tough. It actually prefers less water. It wins even when it seems the odds are against it.
Mr President, in your State of the Nation address two weeks ago you reminded us that our capacity to win is not diminished. We have it within ourselves to be the best in the world.
Congratulations to Miss Universe Zozibini Tunzi, the Springboks, and the Proteas, who won while we were preparing this budget.
Our economy has won before, and it will win again.
Before democracy our growth was pedestrian. Indeed, between 1990 and 1992, the economy contracted for three years in a row.
In the 15 years following democracy, economic growth averaged 3.6% a year. The gross debt-to-GDP ratio declined from 46% to 26%.
In the five years from 2003 to 2008, growth averaged around 5%, and South Africa was amongst the fastest-growing major economies. The unemployment rate improved by five percentage points.
Now, even after a decade of weak economic performance, South Africa still boasts deep and liquid capital markets, strong institutions, the most diversified economy on the continent, and a young population.
We are part of the most vibrant continent in the world. As Pliny the Elder said:
[Out of Africa there is always something new.]
Winning requires hard work, focus, time, patience and resilience. Achieving economic growth and higher employment levels requires a plan.
To quote First Corinthians chapter 9 verse 24: “Do you not know that those who run in a race all run, but only one receives the prize? Run in such a way that you may win.”
Economic context
What are the conditions under which we must implement our plan to win?
In 2020, global economic growth is expected to strengthen to 3.3%. Global inflation remains contained. Global monetary policy is supportive, and we are benefiting from demand for emerging market assets.
Asia (excluding Japan) is expected to grow by 5.8% in 2020. The coronavirus is a source of uncertainty to this forecast.
With growth of 3.5%, subSaharan Africa is forecast to be the second-fastest growing region in the world.
Against this backdrop we forecast that the South African economy will grow by 0.9% and inflation will average 4.5% in 2020.
Over the next 18 months, the economy should get a number of jump-starts. These include:
1. The fruits of the reform agenda led by the president;
2. Lower inflation;
3. The interest rate reduction earlier this year;
4. The recent gains in platinum group metals prices;
5. The impending change to the electricity regulatory framework; and
6. The tax proposals we are setting out today.
Persistent electricity problems will, however, hold back growth. Over the next three years, we expect growth to average just over 1%.
Therefore, a stable supply of electricity will be our number one task.
Towards an economic strategy
Last year, the government embraced the ideas contained in the document Towards an Economic Strategy for South Africa. This is our plan, and it contains the basic and fundamental pillars of our approach:
1. Strengthening the macroeconomic framework to deliver certainty, transparency and lower borrowing costs;
2. Focusing spending on education, health and on social development;
3. Modernising “network industries” and restructuring our state-owned enterprises;
4. Opening markets to trade with the rest of the continent;
5. Implementing a re-imagined industrial strategy;
6. Lowering the cost of doing business; and
7. Focusing on job-creating sectors, such as agriculture and tourism.
Underpinning all of this is the need for an efficient and capable state. We must also leverage the private sector as far as possible.
Today, we report on our progress. “We are moving forward!”
Prudent fiscal policy
A sound macroeconomic framework always lays the foundation for growth.
Budgets are complex, but the numbers are simple.
The numbers show that we have work to do.
For 2020/21, revenue is projected to be R1.58-trillion, or 29.2% of GDP.
Expenditure is projected at R1.95-trillion, or 36% of GDP.
This means a consolidated budget deficit of R370.5bn, or 6.8% of GDP in 2020/21.
Gross national debt is projected to be R3.56-trillion, or 65.6% of GDP by the end of 2020/21.
Tax adjustments
To support growth, we propose no major tax increases.
Indeed, there is some real personal income tax relief.
This budget means that a teacher who earns on average R460,000 a year, will see their taxes reduced by nearly R3,400 a year.
Hard-working taxpayers, who earn on average R265,000 a year, will see their income tax reduced by over R1,500 a year.
Our income tax system is progressive, and the adjustments reflect this. Someone earning R10,000 a month will pay 10% less in tax. Someone earning R100,000 a month will pay about 1.5% less.
We are also proposing broadening the corporate income tax base. This additional revenue will be used to reduce the corporate tax rate in the near future to help our businesses grow.
Start-ups will ignite the economy. The tax system supports them in a number of ways, including the preferential small business tax regime, the VAT registration threshold and the turnover tax. We will review these to improve their effectiveness while at the same time reducing the scope for fraud and abuse.
To support the property market, the threshold for transfer duties is adjusted. Property costing R1m or less will no longer be subject to transfer duty.
There will be a renewed focus on illicit and criminal activity, including non-compliance by some religious public benefit organisations. Religious bodies must operate within the strict boundaries of the law if they are to enjoy tax exempt status. The annual tax-free savings account contribution limit rises to R36,000.
We have increased excise duties to keep pace with inflation. From today:
A 340ml can of beer or cider
●
will cost only an extra 8c;
A 750ml bottle of wine will cost an extra 14c;
A 750ml bottle of sparkling wine an extra 61c;
A bottle of 750ml spirits, including whisky, gin or vodka, will rise by R2.89;
A packet of 20 cigarettes will be an extra 74c;
A 25g of pipe tobacco will cost 40c more; and
A 23g cigar will cost an extra R6.73.
I am again happy to report that there is no increase in the price of sorghum beer.
In line with department of health policy, we will start taxing heated tobacco products, for example, hubbly bubbly. The rate will be set at 75% of the rate of cigarettes. Electronic cigarettes, or so-called vapes, will be taxed from 2021.
To adjust for inflation, the fuel levy goes up by 25c/l, of which 16c is for the general fuel levy and 9c is for the Road Accident Fund (RAF) levy.
Despite this increase, the liabilities of the RAF are forecast to exceed R600bn by 2022/23. We need to take urgent steps to reduce this risk to the fiscus and bring about a more equitable way of sharing these costs. One option is to introduce compulsory third-party insurance.
The carbon tax and other measures will help green the economy, and will bring in R1.75bn over the next few months. This will be complemented by more focused spending on climate change mitigation. We remain extremely concerned about plastic bags throughout the length and breadth of our country. In this regard, we have increased the plastic bag levy to 25c.
● ● ● ● ● ● Reducing structurally high spending
Our measures will support growth. But fiscal sustainability must be uppermost in our mind.
Our Aloe Ferox can withstand the long dry season because it is unsentimental. It sheds dead weight, in order to direct increasingly scarce resources to what is young and vital.
Total consolidated government spending is expected to grow at an average annual rate of 5.1%, from R1.95-trillion in 2020/21 to R2.14-trillion in 2022/23. This is mainly due to mounting debt-service costs. Non-interest spending declines on average over the MTEF in real terms.
As a major step towards fiscal sustainability, today we announce a net downward adjustment to main budget noninterest expenditure of R156.1bn over the next three years relative to the 2019 budget projections.
The total reduction is mainly the result of lowering programme baselines and the wage bill by R261bn. These are partially offset by additions and reallocations of R111bn. Of this, more than half, or R60bn, is for Eskom and South African Airways.
Programme spending adjustments
Let me unpack the R261bn in baseline spending reductions.
The first part is adjustments on programme spending of about R100bn. Some of these were announced in the MTBPS.
Adjustments are mainly in conditional grants for provinces and municipalities.
For human settlements, adjustments amount to R14.6bn over the MTEF. There are also adjustments of R2.8bn to the municipal infrastructure grant.
Over the three years, public transport spending is adjusted by R13.2bn, mainly on allocations to the Passenger Rail Agency of South Africa and the public transport network grant.
The planning and implementation of integrated public transport networks will consequently be suspended in the Buffalo City, Mbombela and Msunduzi municipalities.
Education infrastructure allocations are adjusted by R5.2bn over the medium term, while health is adjusted by R3.9bn over the same period.
While some of these savings are good for the fiscus, in many cases we are also making difficult and painful sacrifices. It is therefore important that we direct our constrained resources to areas that have a high social impact and have the largest economic multipliers.
We shall undertake spending reviews to ensure that we achieve this objective.
The wage bill
The second part is adjustments on the wage bill by about R160bn over the medium term.
Public servants do crucial work for our country, often in trying conditions. The governing party is a firm believer in the critical role of the state in development. For this reason, we need qualified, motivated and effective staff.
Working with the public sector unions, we have over the past 15 years sought to improve the lot of public servants, and we have committed significant resources for compensating them every year even as we have tried to increase their numbers in recognition of their demanding workloads.
Between 2006/07 and 2011/12, we were able to add about 190,000 employees. However, at the same time government wages also increased significantly.
To balance the books, we slowed hiring, and since 2011/12 the number of government employees has declined.
We cannot go on like this. Classroom sizes are growing, hospitals are getting fuller and our communities are becoming increasingly unsafe.
Once we get wage growth, corruption and wasteful expenditure under control, we will focus our attention on hiring in important areas such as education, police, and health care. We can hire strategically, and better match skills with opportunities.
The employer has tabled an